NFT: What it is and how to start investing

You non-fungible tokensor NFThave become a craze in the cryptocurrency market recently. CryptoKitties, Nyan Cator even an art with 5,000 photos. A trio that was immortalized through one of the most advanced technologies fun (and innovative) of cryptocurrencies. This type of token follow a unique pattern, whose peculiarities made them high technologies potential in markets such as art, games and even for collectors.

However, what is it? exactly one NFT and how they work? Is it possible to go? in addition of cute cats and artwork? What makes NFTs so singular – in the literal sense of the word – to the point that many of them are worth millions of dollars? This text will respond to these questions and will bring more details about.

What are NFTs?

As explained at the beginning of the text, NFT is the acronym in English for non-fungible token. The word fungibility describes the attribute of a good that can be substituted by others of the same species, quality and amount. For example, the money is a fungible asset, as a note of R$ 100.00for example, has the same value.

This way, when someone asks borrowed R$100.00, the person who borrowed it does not have to return exactly the amount. same bill. In fact, she doesn’t even need to return a R$100.00 bill, but she can deliver two of R$50.00, five of R$20.00 and so on. In all cases, the value of money is the same.

On the other hand, goods non-fungible no can be replaced for another equivalent. Let us take as an example the Mona Lisaa famous painting by Leonardo da Vinci that is on display at the Louvre Museum in France. That painting is single in all its qualities and therefore, single in the world. Even though it may be copiedcopies will never be the Mona Lisa originalwhose value it’s practically incalculable.

Therefore, NFTs represent real world assetsas songsworks of art, images and others. Just like the Mona Lisa, these goods are unique in the world and cannot be reproduced. Contrary to the Bitcoin (BTC)which has 21 million units identical to each other, an NFT is exclusive and has the following characteristics:

• Represents some good in the physical or purely digital world;
• It has a record on the blockchain that identifies that NFT as unique, preventing fraud;
• It allows the digitization of works that were previously restricted to the physical world, such as art;
• NFT tokens are built using their own standard – the most common standard is ERC-721, used for tokens created on Ethereum (ETH).

Tokens and NFTs

Although an NFT is a token typenot every token is an NFT. In fact, the definition from the word token no is restricted to the universe of cryptocurrencies nor the blockchain. A token can, for example, be used as a system password generator for when users resort to services internet banking.

In this sense, a token is a password or code security with predetermined validity and whose objective is to increase the security of a bank account. Similarly, the famous two-factor authentication (2FA) also serves as a kind of token. Both can also be known as access tokens.

On the other hand, the concept of token in the world of investments is different. Here, they usually represent some financial assetthat is, a good that has market value. This property can be anything from a coin, actions of companies, or even a property physical.

Practically all can be transformed into a token, gaining a representation of its value digitallyas proven with NFTs. This technology gave rise to the process of tokenizationthat is, the transformation of assets into tokens. Here is a list of things that can be turned into tokens:

• Company shares;
• Real estate;
• Artwork, images and even Internet memes;
• Music;
• Messages, such as tweets from celebrities;
• Celebrity or professional athlete contracts.

From Colored Coins to CryptoKitties

The NFT craze exploded in use and popularity as of 2017 and especially in 2020. However, the idea that gave rise to these tokens appeared almost ten years agoin 2012through calls Colored Coins. This protocol was created to work in the Bitcoin and allow the manipulation of unique digital assets.

Initially, the idea of ​​the project was to create markings that would allow differentiate each of the 21 million BTC existing ones. Later, technology also made it possible to create new tokens within the network. In a way, colored coins would allow Bitcoin to accomplish what it is today carried out by Ethereum.

“Colored coins were not just precursors to NFTs themselves, but rather to tokens as a whole, which ultimately include NFTs. They allowed Bitcoin scripts to be used and tokens to be created on the blockchain. It was possible to produce a unique, non-fungible token, or to issue multiple identical tokens.”, explains Edilson Osório, founder of the startup OriginalMy.

However, the cost to create these tokens in the Bitcoin became prohibitive and the idea did not prosper. So, it was in Ethereum that arose, in 2017the first big phenomenon of NFTs: the famous CryptoKitties. Launched at the height of the market’s great bull run, the CryptoKitties game allowed purchase of custom kittens within the blockchain. Each of them was identified as singlesomething that caught the attention of several collectors.

Due to the hype generated in the market, CryptoKitties boomed and generated around US$ 12 million in sales only in the first 20 days. At the time, the smart contract of the game came to answer for 15% of all transactions on Ethereum and even temporarily overloaded the network.

What makes NFTs unique?

As seen at the beginning of the text, NFTs are created through a standard known as ERC-721 – in the case of the Ethereum blockchain. This standard establishes a type of blockchain signature that transforms any type of digital media into a non-fungible asset. Thus, a GIF or JPEG, photos, videos, messagesfiles of audio etc., can be marked as unique and thus have proof of originality.

However, NFTs no remove copies of a famous work that has been tokenized from circulation. The technology does not prevent piracy, but rather provides a certificate of exclusivity on blockchain. In this sense, an NFT serves to verify that such a work is, in fact, the only and original of its kind.

Physical and digital artworks

For example, consider the meme of Nyan Cat, created in 2011 by artist Chris Torres. Ten years later, in February 2021, the original GIF was sold for the trifle of US$ 580,000 — about R$ 3.28 million at the time. The NFT corresponds to the original meme created by Torres, which is now in the possession of a single person.

If you search for Nyan Cat on Google, you will still find copies of the meme. It exists only on the Internet and has never been exhibited in any famous art gallery. However, it is a digital art and it was negotiated that way.

In fact, technology has driven the creation of the digital art market, that is, art that does not exist in real life. Some NFT works have gone down in history, such as the work Everydays: The First 5000 Daysby the digital artist Beeplea collection of photos gathered by the artist over the course of 5,000 days. The work was sold for more than R$ 380 million in March 2021.

Finally, even the first tweet in historywritten by the founder of Twitter Jack Dorsey in 2006, it also ended up in this market. The message was sold in an auction format, in which the best offer won. In the end, the NFT was acquired for the trifle of R$ 10 million.

Both the Nyan Cat as for the work of Beeple and Dorsey’s tweet no have a physical representation. In the case of the work, the winner of the auction acquired a .JPEG file with 319 GB and you will have to leave it on an external HD or on your computer. The work, however, is originalunique and has a certificate inviolable and immutable recorded on the blockchain.

How to trade NFTs?

NFTs are created and registered through technology blockchain. Therefore, acquire and make the payment of these works no depends only on one bank transfer or a Pix. On the contrary, it is necessary to acquire a cryptocurrency and use it to make the NFT payment.

Which network or cryptocurrency will be chosen will depend on the platform where the NFT was created. These works are often traded in the Ethereumtherefore, it will be necessary to make the payment in Ether (ETH). Payment is made through a smart contract which guarantees the authenticity of the transaction, as well as the work that was acquired. There are some platforms that mediate the negotiation of NFTs, such as:

As it is recorded on the blockchain, the NFT contains all the trading history of that work. Thus, a buyer can verify both the authenticity and whether the work is being sold by the one who is truly yours rightful owner. This audit, in turn, no depends on none curator, museum or trusted third party to be carried out.

Ultimately, NFTs have evolved the concept of digital scarcity brought about by the creation of Bitcoin in 2009. Even though there are copiesthe owner of an NFT knows that his work is original and authentic. After all, the value of something is subjective and, in the case of NFTs, it has grown with each operation carried out.

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